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  <h4 class="font-weight-normal my-2" style="font-size: 20px;">When do you think the UST yield curve inversion will
    end?<a href="https://en.macromicro.me/spotlights/188/when-the-yield-curve-uninverts-one-indicator-for-bond-price-movements"> Share your insights!</a></h4>
  <div class="text-black-50 text-right py-2"><i class="fa fa-clock"></i> Poll closes <span class="ts" data-ts="1714390200" title="29 Apr 2024, 12:30">29 Apr 2024, 12:30</span></div>
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SPOTLIGHT

WHEN THE YIELD CURVE UN-INVERTS: ONE INDICATOR FOR BOND PRICE MOVEMENTS

1302024-04-15

The US economy appears to be on track for the best-case scenario of no landing
with moderate economic growth. Fed officials have also publicly signaled the
possibility of delaying interest rate cuts. What would be a good time to start
investing in bonds? Here we introduce one chart that reveals the relationship
between yield curve shifts and bond prices.

NEGATIVE YIELD SPREAD AND ITS REVERSAL

Most of the time, the spread between long-term and short-term Treasury yields is
positive (10-Year Yield > 2-Year Yield). However, when the Fed raises policy
rates in response to overheated economic activity and elevated inflation
expectations, short-term yields typically rise as well. This can cause
short-term yields to exceed long-term yields, flipping the yield spread into
negative territory (10-Year Yield < 2-Year Yield), also known as yield curve
inversion. This was the case in 1989, 2000, 2006, and 2022.

Prolonged yield curve inversion often prompts financial institutions to favor
short-term lending due to its higher interest rate returns over long-term
corporate lending, which can increase risks in financial markets. Consequently,
the Fed usually aims to keep the yield spread positive. When the spread turns
negative, the central bank employs accommodative policy measures to lower
short-term yields, gradually reverting the yield spread back into positive
territory. During this process, the bond market often enters a bull market, as
declining short-term yields push up bond prices.

As shown in the chart, when the yield spread goes from negative to positive
(marked in blue circles), bond prices will start to trend upward (marked with
black arrows), until the yield spread reaches a high point. This is because an
un-inverting yield spread signifies the Fed is about to ease policy to enhance
market liquidity, which will lead to a gradual increase in bond prices as
short-term interact rates come down.

Conversely, when the yield spread reaches a peak and starts to decline, it means
interest rate dynamics are changing again and the bond market should expect
heightened volatility.

MM TAKEAWAYS

Looking at the present, yield curve inversion has persisted for 22 months since
July 2022. If the Fed starts easing QT and cutting interest rates as expected in
the second half of the year, the yield curve will start to un-invert, creating
good entry points for bonds. Investors can continue to monitor this chart to
identify the optimal timing.

Links
10Y/2Y UST Yield Spread10Y Yield vs. Bond PriceMore Indicators for US Treasuries
Poll Booth

WHEN DO YOU THINK THE UST YIELD CURVE INVERSION WILL END? SHARE YOUR INSIGHTS!

Poll closes 29 Apr 2024, 12:30
 * 2024 1H
   
   0.0%
 * 2024 2H
   
   33.3%
 * 2025 1H
   
   66.7%
 * 2025 2H
   
   0.0%
 * 2026
   
   0.0%

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